EUR/USD Fall to 1.05 Remains a 'Distinct Possibility'

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The Euro to Dollar exchange rate is likely to fall further in the week ahead as the strong downtrend extends.

The EUR/USD recovered lost ground at the start of the new week amidst broad-based Dollar underperformance.

At the time of writing on Tuesday the pair has risen from the week's open at 1.0583 to touch 1.0632.

The consolidation around the 1.06 region could of course lead to further gains, but on the evidence we have the easiest route remains lower.

EUR/USD is in a steep downtrend and although some analysts now see it as oversold and in need of a bounce – even if it is just temporary – most agree the longer-term outlook is bearish.

Technical studies are advocating for an extension of the trend with the MACD indicator being below the zero-line indicating more downside is probable:

A break below support and resistance at 1.0530 could signal a bearish continuation, with a move below 1.0500 confirming a run lower to a target at 1.0400.

It must be noted that while downside is favoured there are notable support points to be aware of.

Strong support is seen between current levels and those 1.0450 lows set last year.

But, support could break eventually.

"Ultimately we have been open to the entire contracting range since March 2015 as a consolidation within the long-term bear trend. We are therefore on high alert for a breakdown through the key 1.0600-1.0450 lows, opening a potential move towards parity," says Robin Wilkin at Lloyds Bank.

Scotiabank’s FX Strategist, Saun Osborne is also bearish but sees an increasing risk of a near-term correction developing.

Osborne advises traders not to ‘chase’ the exchange rate lower, but rather to wait to sell at a better price upwards of 1.0700.

"A test of the support zone around 1.05 remains a distinct possibility as the trend-following indicators (MACD and DMI) continue to remain drags. Only the oversold signals generated by RSI and the Stochastic suggest potential for consolidation," says Ralf Umlauf at Helaba in Frakfurt.

Helaba's favoured trading range is for between 1.0520 and 1.0670.

US Dollar may be Overbought

The currency pair's decline is largely a function of Dollar strength as the EUR/USD has been in a downtrend since the US presidential election as markets quickly priced higher future inflation and interest rates in the United States under a Trump presidency.

The sheer strength of the Dollar since the elections suggests investors are focused on the prospects of sizeable US fiscal stimulus in the form of tax cuts and incentives for profit repatriation to the US.

Dr. Vasileios Gkionakis, Global Head of FX Strategy at UniCredit Bank in London, is actually quite surprised by the markets reaction as he believes the market is almost completely ignoring Trump’s harsh rhetoric on trade policies and immigration, both of which would have adverse consequences for future US growth.

“In a nutshell, investors see only the positives and refuse to even contemplate the negative possibilities. This sentiment has led to one of the most brutal rises in US nominal rates and has seen the USD strengthen across the board, a move that has brought the greenback further out of line with fundamentals,” says Gkionakis.

A look at the Dollar’s strength, when compared to it’s long-term fair-value benchmark which are yield spreads, confirms an overvaluation:

So we know the USD is overvalued, but timing your bet on a correction could bring tears.

Key Data for the Euro This Week

The main release in the coming week is Purchasing Manager data for Eurozone Manufacturing and Services, which is released on Thursday, November 24 at 9.00 (GMT).

The results are expected to show a pullback in activity in November 53.2 from 53.5 in Manufacturing and a slight rise to 53.0 in Services from 52.8 previously.

The Composite PMI is expected to remain unchanged at 53.3.

Thursday, November 24, also sees important sentiment data released in the form of the Ifo Business monitor at 9.00 – a gauge of general Business confidence which is often accorded predictive powers.

The Ifo’s Headline figure is forecast to rise to 106.3 in November from 106.1 in October.

“We expect both the euro-zone Composite PMI (Wednesday) and the German Ifo Business Climate Indicator (Thursday) to have improved in November,” commented Capital Economics’ Stephen Brown.

Gfk German Consumer Confidence, out at 12.00, completes the confidence data roster on Thursday.

Thanksgiving Effect

On Thursday, November 24 it is Thanksgiving Day in the US, a national holiday.

Research conducted by Kathy Lien of BK Asset Management, indicates that dollar pairs often experience much wider-than-average trading ranges on the day after Thanksgiving.

So common is the phenomenon, that it has led to a strategy called the ‘Thanksgiving Effect’.

“While many U.S. traders also take Friday off, the intraday range of the EUR/USD, GBP/USD and USD/JPY tends to expand significantly on the day after Thanksgiving.

“Some traders are back and the low liquidity exacerbates the volatility in the FX market,” says Kathy Lien.

She goes on to provide empirical evidence that the increase in volatility is quite marked:

“The following table shows that on average since 2003, the trading ranges for the EUR/USD and GBP/USD increases 200% the day after Thanksgiving. The impact on USD/JPY is less significant but we still see similar trading activity.”

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We advise traders to adopt a breakout strategy and will be watching the tight ranges on Thanksgiving day and providing guidance on how to position for the volatility on the day after nearer the time.

Other Key Data

This week will be dominated by continuing speculation about potential key appointments to Donald Trump’s new administration.

Then on the har data front Existing Home Sales are out at 15.00 (GMT) on Tuesday, November 22, and are expected to show a reduction to 5.42 million from 5.47m.

Wednesday, November 23 sees the release of Durable Goods Orders at 13.30, with Core Orders forecast to rise 0.2% mom in October from 0.1% in the previous month.

“Otherwise, October’s durable goods report (Wednesday) is likely to reveal a big surge in orders, albeit mostly due to a spike in the notoriously volatile commercial aircraft component,” said Capital Economics’ Paul Ashworth.

New Home Sales are released on the same day and are expected to show a rise of 590k in October, from 593k previously.

Crude Oil Inventories, out at 15.30 could also influence the dollar on Wednesday, although many traders may have already taken money off the table before the Thanksgiving Holiday on Thursday.

The Euro-to-Dollar rate rose Thursday as traders responded to a "dovish" set of Federal Reserve meeting minutes by dumping the US Dollar but the path ahead for the exchange rate is now increasingly muddied by the mounting prospect of a renewed protectionist bent in White House trade policy.

The Euro likely bottomed out at a six-month low this week, according to strategists at CIBC Capital Markets, who argue the exchange rate now offers "good value" to speculators who are brave enough to bet on a recovery by the single currency.